The Expert Podcast

If you're a retailer or sell any type of product, either online or in person, you have certainly been a victim of friendly fraud. Friendly fraud is a form of theft from a company where a customer purchases something from you as a merchant and then later claims a chargeback or dispute on their credit card. They may claim they didn’t get the right item, never received it, or make another improper claim. An article came out today calling it "first-party delivery fraud," where the cardholder falsely claims they never received the item but actually did.

Sometimes cardholders claim that their credit card was misused or not used properly. Other times, they might allege they didn’t receive the correct product or service. This practice is very common and much more prevalent today than it used to be. In fact, one-third of Americans commit this crime, according to a survey. That’s a huge number, and as a merchant, it can cost you more than just the loss of that sale or product.

We’re going to talk about how to prevent this fraud and, more importantly, how to respond when it happens in a way that might stop it early. Many people committing this type of fraud don’t realize it can be discovered. If you can catch the cardholder in the act, the dispute or chargeback can be reversed. Ideally, the cardholder withdraws it intentionally, or you win the chargeback. The key is not to let the chargeback stand because the losses extend beyond the money itself.

For instance, if you sell an item for $700 and the customer disputes it, you lose that $700 plus the chargeback fee, which can range from $70 to $90 or more. Additionally, accumulating chargebacks can lead to your account being flagged. If chargebacks exceed 1% of your transactions, you might lose your merchant account. Initially, your sales may be frozen, with the bank holding 30 days’ worth of reserves, and eventually, they may close your account altogether. This is why it’s crucial to address chargebacks promptly.

So, what can you do? First, let’s look at how widespread this issue is. Statistics show that 35% of surveyed Americans admit to doing it. It’s sometimes referred to as "buying and lying," which includes falsely claiming delivery to get a refund or choosing not to pay off a credit card bill. Gen Z consumers are the most likely to commit this fraud, with 52% saying they would do it if there were no negative consequences. That’s the key—no negative consequences.

To handle this, follow a three-step process. First, send the cardholder a notice. Don’t rely solely on the bank. Create an investigative report with all the facts because most people committing this fraud believe no one will follow up. You’ll also need clear terms and conditions on your website addressing such issues and should research the customer’s claims.

We send customers an investigative notice through a licensed private investigator. The notice informs them that a full investigation is underway regarding the credit card dispute reported to your company. The notice emphasizes that the merchant (not the bank) is financially affected. It explains that false claims leading to financial transfers from the merchant amount to fraud, which is a crime.

The notice also highlights that the dispute appears active and that the cardholder is in possession of funds transferred from the merchant. Additionally, include details about the specific product involved, such as a photo of the item (e.g., a surfboard), to catch the recipient’s attention. If the dispute is resolved, the investigation will be terminated. This shows seriousness and can deter fraudulent activity.

Include evidence such as a delivery map showing the item was sent to the specified address and match the IP address used during the order. If the cardholder claims theft, let them know you will alert neighbors and investigate nearby incidents. This can reassure honest customers and put pressure on fraudsters. Mention plans to search platforms like Craigslist or social media to see if the item is being resold or used.

Additionally, outline the negative consequences of fraudulent claims. Inform them that a licensed investigator will trace the IP address to identify the internet provider and account holder. Include a tip line for neighbors to report stolen items. This strategy can unsettle scammers while assuring genuine customers that you’re working to resolve the issue.

Finally, always respond to chargebacks with detailed reports. Even if you lose, replying shows the bank that you’re not negligent. Ignoring disputes can label you a high-risk merchant, increase rates, or even lead to account closure. Having clear terms and conditions on your website also supports your case.

Remember, most fraudsters assume merchants won’t fight back. By laying out the consequences and investigating claims thoroughly, you can discourage fraudulent activity and protect your business from significant losses.